Look, up until 2007, very few people had even heard of "short sales" on homes. That is until Congress (both Dems and Republicans) approved the 2007 Mortgage and Forgivness Act of 2007.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
Essentially before this temporary law (law will be in effect from 2007 through Dec 31st 2012), if one "shorted the bank," the bank would simply issued a 1099 tax bill at the end of the year. So for example: You owe $500K on the mortgage. You 'short the bank" 100K and agree to sell for $400K. The bank says fine, go ahead. When it's all said, the bank sends you a 1099 and you must pay taxes to the IRS on that 100K shorted.
Pretty big deterrent to avoid short sales? Right? You see, once Congress got their nasty hands involved in trying to fix real estate (by forgiving short sales), it makes the situation much worse because you know have every Tom, Dick and Harry trying to "get out of jail card" by trying to short sale their home. Creates much more havoc and doesn't do a bit to help the real estate market. Duh.... more short sellers (because they know they won't get a 1099 tax bill) means more distress properties.
Now I read a freaking NBA player, Kevin Martin. Oh he makes 10 millions dollars a year wants to "short sell" his 1.9 million dollar home for 1.1 million.
NBA's Kevin Martin defaults on California mortgage - Yahoo! News (http://news.yahoo.com/s/ap/20101015/ap_on_bi_ge/us_nba_player_default - broken link)
This is ridiculous. Someone making 10 millions dollars (even after taxes) can bring $800K to the table to sell the home. But now, he and his smart lawyers/accountants know they have the upper hand. They are just taking advantage of the law Congress created in 2007 (and California's friendly non-judicial foreclosure and could walk away and owe nothing) . Do you really think he would try to short sell his home if he would have to pay taxes on that $800K?
Congress needs to just repeal this short sale law now. Let the real estate market. Let our economy fix itself. Every government intervention in the real estate market has done literally nothing to fix the real estate mess. We would have hit bottom by now without government intervention. $8000 Housing tax credit, giving $3000 "kickbacks" to not only 2nd and 3rd lien holders to forgive the loan but also giving $3000 to short sellers just to move away. All these gimmicks have got to go.
Kevin Martin of the Houston Rockets should be the poster child of what's wrong with real estate market. It's like the mob effect. Everyone is doing it but that doesn't mean it's right.
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